Some drivers for the recent retracement in yields: i) Regarding the US, we definitely don’t find any major argument in the expectations for Fed rates; ii) Macro data flow has not been conclusive enough on either side; iii) The main factor may be found in the recalibration of the “paper risk”, by the market;
Euro curves: apart from the spillover effect from the US curve some specific fundamentals are also playing out,namely: i) The macro context remains challenging; ii) heating up of the debate on how sensitive the ECB will be to these macro challenges, with a clear confrontation between the GC doves and those calling for caution. At this stage the market is clearly bending towards the former rather than the latter; iii) The political noise stemming from France is to some extent adding more bullishness /dovishness to euro curves through safe-haven-seeking flows.
Looking ahead: Bund real rates now stand at 0.30%, which is the floor of the range observed since May that has been tested but not breached up to four times since. In our view, always keeping an eye on the US curve (and particularly employment) and also on France’s political developments, this reference should still work out so we still see room for some consolidation or even recovery from 2.0/2.05% in nominal terms.
Tactical approach on peripherals: i) Considering the huge negative net supply this week, ii) the decision of S&P not to negatively change the French rating/outlook last Friday and the positive action of DBRS on Spain and iii) the absolute value reached by core yields, we expect peripheral spreads might continue to perform well both in vs. Bund or in ASW terms (in the Italian case we might expect a weekly tightening in the region of c.5bp in the 10Y tenor); ii) considering the lack of scheduled supply for Italy this week, we might expect the Italian Treasury might execute an exchange/buyback operation which might trigger a specific good performance of the 2H2025-2026 bonds in particular vs. French and German bonds with the same maturity.
Weekly supply. On the bills market total issuance will be c.EUR25.8bn in gross terms (c.EUR22.5bn in net terms). In bonds Germany, Spain and France will be active this week. Total issuance is expected to be c.EUR16bn in gross terms but a negative c.EUR23bn in net terms (redemptions from Italy and Spain).